The Money Flow Index (MFI) is a technical indicator that measures buying and selling pressure using price and volume data. It helps traders identify if a stock is overbought or oversold to make better trading decisions. MFI combines price movements and volume to show how money flows in and out of a stock.
What is the Money Flow Index (MFI)?
The Money Flow Index is a momentum indicator that uses both price and volume to measure the strength of money moving in and out of a stock. It is also called the “volume-weighted RSI” because it is similar to the Relative Strength Index (RSI) but adds volume data for better accuracy. MFI values range from 0 to 100 and help traders understand market trends and possible reversals.
How Does the Money Flow Index Work?
The MFI works by calculating the typical price for each period (usually daily), then multiplying it by volume to get the money flow. It separates positive money flow (when the typical price rises) and negative money flow (when it falls). The ratio of positive to negative money flow is used to calculate the MFI value. When MFI is high, it shows strong buying pressure, and when it is low, it shows strong selling pressure.
How Does MFI Help Traders?
MFI helps traders by signaling overbought and oversold conditions in the market. If MFI goes above 80, it means the stock might be overbought and could see a price drop soon. If it falls below 20, the stock might be oversold and could rise soon. Traders use these signals to decide when to buy or sell to increase profits and reduce losses.
What Are the Key Levels of MFI?
The important MFI levels are 20 and 80. Below 20 means oversold, which can be a buying signal. Above 80 means overbought, which can be a selling signal. Sometimes, traders also watch levels 30 and 70 for early signals. These levels help in identifying potential trend reversals before they happen.
How to Use MFI with Other Indicators?
Traders often combine MFI with other tools like RSI, moving averages, or MACD for better accuracy. For example, if both MFI and RSI show overbought, it is a stronger sell signal. Using volume-based MFI with price-based indicators helps confirm trends and avoid false signals. This combination improves decision-making and reduces trading risks.
What Are the Limitations of the Money Flow Index?
MFI is useful but not perfect. It can give false signals during very strong trends. Sometimes a stock stays overbought or oversold for a long time. It also depends on accurate volume data, which may not always be reliable. Traders should use MFI carefully and always combine it with other analysis tools.
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